By Thomas Kostigen
Investing in forestry has historically been for old money: high net worth multigenerational estates more concerned about asset protection and wealth preservation than capital appreciation. But new investment products have been designed so that investors don’t have to buy large tracts of timberland to gain value, as wealthy families and institutions have in the past. Nor do they have to sit on their investments for decades as these investors–largely family offices and institutions–have to see returns.
Forests hold natural, as well as commercial value. The S&P Global Timber & Forestry Index, for example, has outperformed the S&P 500 Index over the past year. And direct ownership in timberland itself appreciates well over decades, with little volatility.
Besides direct ownership, there are forest funds, timberland REITS, forestry ETFs, and forest company shares. Of course, there are numerous timber companies in which to invest to gain access to the market. A good financial advisor should be able to point you in the right direction as to which forest investment is appropriate for you.
According to ForestFinance, a Germany-based company that builds and protects forests and develops investment products from them, “The benefits of forestry investments are the growing demand for the raw material wood. There are fewer and fewer forest areas and already today the demand for wood exceeds the supply. This suggests that timber prices will continue to rise in the future and ultimately all investors will benefit from this. If the forests are also managed sustainably – or are even designed, as with ForestFinance, to become permanent, near-natural forests – an investment in forests can literally generate green returns.”
To be sure, there are challenges with certain types of forestry investments. The biggest of these is time: it takes a long time for trees to grow. Then there are social and environmental issues that need to be managed properly. Deforestation, of course, is an example of this. Fair labor practices are also an issue. And poor environmental land management practices, such as using pesticides to facilitate growth but which harm ecosystems at large, need to be monitored. And those are just the risks associated with human intervention. Natural risks are also legion. Wildfires, earthquakes, floods, droughts and diseases can impair forests and lands.
All that said, the timber market is indeed poised for growth. COVID-19 has halted many forestry operations. Post pandemic, these operations are set to ramp up again as building needs resume. A good lead on this has been the strong performance of Home Depot and Lowe’s, which cater to the home improvement and builders’ markets.
Another big factor in the forestry sector’s future is technology. Precision forestry is providing efficiencies for timber companies (as well as positive results for the environment), and can increase profit margins. Precision forestry includes digital mapping technologies, advanced monitoring capabilities for prevention of illegal logging and deforestation, as well as Big Data that help manage supply chain demands, among other things.
In short, there’s more to forestry investing than its trees.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.